CASE ANALYSIS:

Zapatoes, Inc

Anthony Cruz owns Zapatoes, Inc., a home-grown Filipino shoe company. His
company has experienced tremendous growth since it has started its operations in
2009. With a growing demand for his products, Anthony Cruz is considering
expanding his operations by opening his first production facility. Currently, he pays
another company to manufacture the shoes he designs. He is contemplating to
produce the shoes Zapatoes, Inc. facility, with the hope of lowering the cost of
production. The company needs PHP10 million to finance this expansion and is at a
tight cash position. Anthony Cruz is now wondering where to get the funds needed –
invite an investor or personally borrow from a bank?

Zapatoes, Inc. sold 3,300 pairs on 2013, 4,500 pairs on 2014, and 6,200 pairs in
2015. With the brand’s target market – young professionals and college students, it
can only sell it at the PHP1,000 to PHP2,000 price range per pair.

Anthony is wondering whether owning his own manufacturing facility can really
improve its profitability. Currently, he is producing his shoes at PHP475 pesos per
pair. He expects that he can lower production costs to as much as PHP300 per pair if
he will manufacture it himself. However, opening a new production facility will
increase operating expenses (including depreciation) by 30%. Currently, most of his
operating expenses are marketing and distribution costs.
To finance the PHP10 million facility, he has three options:
•Accept a PHP10 million equity investment from his friend, Alex. Alex will hold 45%
percent ownership of the business afterwards. Alex does not demand any specific
return.
•Short-term loan for 1 year for PHP10 million at 6% per annum from Shortime Bank.
•Long-term loan for 5 years for PHP10 million at 10% per annum from Longly Bank.

Anthony is very confident that his sales volume will still grow for the next 5 years.
However, his confidence is tainted by his uncertainties over the impact of opening a
new production facility. What must he do?

Guide Questions:
1. What is the Zapatoes Inc’s capital structure? What is the effect of an additional
debt? Additional equity?
2. Assess the profitability of Zapatoes Inc’s. What is the effect of issuing debt to its
profitability? Effect of equity?
3. What factors are considered in deciding whether to take long-term or short-term
financing?
4. What financing should Anthony Cruz take?

Here are the comparative financial statements of Zapatoes, Inc.: